National Oil Companies (NOCs)

13. Business models

There are two main features that distinguish government-owned firms from private firms:

a. the residual ownership claims cannot be transferred to another party unless the government relinquishes ownership, so the government is able to shape the NOC’s pricing policies, even if there are institutional safeguards that protect the independence of the NOC’s management; and

b. the managers of government-owned firms are accountable to politicians rather than profit-driven shareholders.

Good governance of NOCs requires attention to the role of EI sector or financial ministries in exercising the shareholder role on behalf of the state. Commercially based shareholder roles can lead to companies that compete strongly in the international market place. Examples of companies with a strong commercially based shareholder role include: Petronas in Malaysia, and Vale and Petrobras in Brazil.

A misguided or corrupt shareholder role that is combined with large non-commercial roles can lead to companies that are now producing only a small fraction of their peak production. Examples of companies from the petroleum sector include: the Nigerian National Petroleum Corporation (NNPC) in Nigeria and Pertamina in Indonesia, both of which have incurred huge financial losses in the past.

Six recommended shareholding characteristics at the top NOC management level

A strong commercial shareholder role is recommended to have these 6 characteristics at the top NOC management level:

1. Shareholding needs to be held in the name of one or more government officials (such as EI sector or finance ministries) which will appoint the board of directors who are the shareholders representatives governing the NRC. The directors should be selected and appointed on the basis that they are knowledgeable about the business, and be fully committed to the NOC’s commercial interests. The directors should be fully independent of management and management influence.

2. Board and management appointments should be made on the basis of professional qualifications and experience, not according to political or family affiliations.

3. The board of directors should provide the management with a clearly stated mission related to resource development (including mineral or petroleum processing and marketing as appropriate).

4. The NOC management should focus on its core business and does not expand its activities into other non-core business areas. The board of directors should approve only those company business and investment plans that are consistent with shareholder objectives (including the scope and focus of core business, and the employment and remuneration policy).

5. The NOC should be financially independent, and should raise funds through commercial borrowing of needed debtor listing in stock-exchanges.

6. The NOC, its managers, and directors should be excluded from any regulatory-type roles or activities.